No one can predict the future, but understanding how bull and bear markets work gives you a better chance of success in trading. In this article, we’ll explore what bull and bear markets are and how you can use this knowledge to your advantage in your trading strategy. If you don’t have a trading account, you can join here.
What is a bull market?
A bull market is a period in which stock prices are rising or are expected to rise. The term “bull” is used to describe this market because of its analogy to how a bull attacks by thrusting its horns upwards. A bear market is a period of declining stock prices, and it gets its name from how a bear swipes its paws downward.
Although there is no definitive timeframe for either type of market, most people consider a bull market to last for several months or more, while a bear market typically lasts for two months or less. Significant indexes like S&P 500 are often used to gauge whether the stock market is in a bull or bear phase.
What is a bear market?
A bear market occurs when the stock market has a sustained price decline. While there is no definitive threshold for declaring a market to be in “bear territory,” typically, a drop of 20% or more from recent highs is considered enough to merit the label.
Bear markets can be caused by many factors, including economic recession, inflation, high-interest rates, and war. They can last for months or even years and generally only end when stock prices start to rebound.
Over time, stock prices have consistently trended upwards, so patience is typically rewarded in the long run.
How to identify when the market is in a bull or bear phase
For many investors, one of the most challenging aspects of stock market investing is identifying when the market is in a bull or bear phase.
A bull market is typically defined as when stock prices rise and optimistic investor sentiment is dominant. In contrast, a bear market occurs when stock prices fall and investor confidence is low.
Though there are no sure-fire ways to tell whether the market is in a bull or bear phase, a few key indicators can provide some clues. For example, corporate earnings and stock prices rise during a bull market.
In addition, economic indicators such as employment and inflation tend to be relatively positive during bull markets. By contrast, corporate earnings often lag behind stock prices during bear markets, and economic indicators tend to be more harmful.
While it can be difficult to perfectly time the market, paying attention to these key indicators can help give investors a better sense of when the market is beginning to turn.
What causes bull and bear markets?
While many factors can contribute to bull and bear markets, there are two primary causes. The first is the overall health of the economy.
When the economy is strong and growing, businesses are more likely to succeed, and their stocks will rise in value. However, businesses are more likely to struggle when the economy is weak or contracting, and their stocks will fall in value.
The second major factor is investor confidence. Investors who feel bullish about the market are more likely to buy stocks, driving up prices. However, when investors lose confidence, they may sell off their stocks, leading to a decrease in prices.
While many other factors can influence markets, these two are the primary drivers of bull and bear markets.
How to protect your investments during a bull or bear market
When it comes to investing, there is no such thing as a sure thing. Markets go up and down, and a sudden shift can catch off even the best-informed investor guard. You can do some things to protect your investments in these instances.
One of the most important things you can do is diversify your portfolio. This diversity means including different investments, such as stocks, bonds, and cash. This way, if one type of investment starts to lose value, you will still have others that can offset the losses.
Another critical step is to review your investments regularly and make adjustments as needed. For example, if you have a stock that has lost value during a bear market, you may want to sell it and invest the proceeds in something else.